Skimming interest on cash is so last season! Transact’s Glen Sweet gives us the low down on cash and client charges

Transcript

Bella Caridade-Ferreira:

Hello everyone, and welcome to Compare the Platform’ s Cut Through the Noise podcast series, which basically does what it says on the tin; cuts through the noise in the market and brings you content that matters. If this is your first time on your podcast, welcome. You can subscribe to it on all good podcast platforms. So today in the studio we have Glen Sweet. who is Head of Distribution at the Transact platform. And as we all know, Transact has been around for a very long time and Glen will tell us a bit more about that. But Glen welcome, welcome to the studio.

Glen Sweet:

Hi, good morning. Yes, nice to be here. Thank you, Bella.

Bella Caridade-Ferreira:

It’s lovely to have you here. Transact was the first independent wrap in the market, take me back to those early days. Tell me a bit more about your career and how that all got started please.

Glen Sweet:

Well, I mean, I found Transact quite by chance actually. So I was looking around, I used to be an advisor myself. So, first meeting with Ian Taylor, one of our founders, end of 99, joined the business in February 2000 and we launched officially in March 2000. So yeah, there was essentially ten of us at the time and yeah, it was a very interesting time. There’s, I mean, across the group now, there’s 550 of us, something like that. So it’s been a very interesting and enthralling time over that sort of 23 year period, just to see the changes in the marketplace, the dynamics of, the sort of competitive landscape changing significantly and of course, not least of which the regulatory change that’s ever coming our way, really has been, has been challenging too, but it was ever thus it ever will be. So, yeah, it’s been a fascinating time and it’s certainly the most rewarding period of my career.

Bella Caridade-Ferreira:

So I mean, Transact started in 20, sorry in 2000 and here we are 23 years later when you’re a PLC. So that’s an incredible achievement for the team of ten that started this, and even today, you stand out very much from the crowd and one of the things that we’re going to talk about today really is the whole cash element really.

Glen Sweet:

Sure, a topic close to our heart.

Bella Caridade-Ferreira:

Absolutely a topic close to your heart, and, I’m going to say something a little bit controversial, and say cash probably didn’t matter very much until a couple of years ago, when interest rates started to rise and markets started to come down or cost of living started to increase, it suddenly became, you know, it became a central, really important thing, that was driving a lot of platforms, businesses, right. And you were different. Tell me why, Transact, what your stance is on this position?

Glen Sweet:

Well, right now it’s never been more impactful, but I would, I would argue there’s been plenty of periods in the past when it’s been significantly impactful to the outcome for the client. So I mean, so I suppose the question is, another way to phrase that is, why the disparity? Why is there disparity in interest rate payments to clients over the multiple providers that are in the marketplace at the moment. So really it’s quite simple, it’s very, very simple. You know the business objectives drive the behaviours and drive the policy of the organisations. It’s clearly in their interests to keep a headline rate looking attractive, and in the ballpark, and it’s a level of detail that tends to get glossed over about the actual net outcome for the client, and that’s what clearly we would say is the most important thing. What does the client actually get over the longer term? And there’s been plenty of commentary on this recently from advisors and we wholeheartedly agree, where we’ve seen comments that, well, you wouldn’t take a distribution or a dividend off the client, so how the hell can you take, you know, the interest off the client to the degree to which you do? It’s a very valid question and we just don’t think it’s right, fair, appropriate, or in keeping with good consumer outcomes. Let’s start with the, with, what’s the most complex and troublesome and time-consuming asset that any platform manager has? It’s cash. I absolutely concede, and anyone should concede that point, in understanding, it’s horribly, horrifically complicated.

Bella Caridade-Ferreira:

I was going to say, I was going to ask, why is it complicated to put cash on platform?

Glen Sweet:

Well, well, not to put cash on and leave it as cash. That’s not. But you think about, you’re taking dividends and distributions and interest off of various assets over various timeframes that you’re reconciling on a daily basis, in all different tax regimes, sorry, all different tax wrappers with different taxation implications. You’re dealing with multiple banking institutions from instant access, you know and term deposit takers. You’ve got all the complexity of dealing with the sort of regulatory, you know, principles and cash controls that are in place. It’s complex stuff, and it moves all the time. I mean, holding just to pick a random fund. I don’t know, Artemis Income or Fidelity European, that’s a cinch compared to cash. So yes, there’s associated cost involved, yes, if you’re going to do cash properly, you need a treasury function that has a cost. So it’s actually more costly to run than assets, and it’s fine, again, just to just to clarify the point, completely fine, reasonable and appropriate, to charge on cash, even to charge more on cash than you would do on assets. That’s a reasonable position. But what more, how much more is it costing you to run cash or to administer cash than it would be to administer an asset? It’s a bit more. I’m talking marginally more, but it is more so it’s ok, if the platform was to say, ok, we charge 25 basis points flat, but for example, it’s just more to run, you know cash. So we know we’re going to take 10 more now. We’re going to take 35 skim on cash. Completely perfectly reasonable to do that. But to take half of it or three quarters of it is massively impactful for clients massively negatively impactful. Yes, our clients have larger cash holdings than the average platform would do. We’ve got wealthier, older clients that do a lot of intergenerational planning between kids and grandkids and trusts and even corporate cash. You can’t get any decent rates for corporate cash. Most platforms can’t deal with the corporate holding, but we can, but that’s another matter. But our average is about 6.5%. Other platforms are half that. 6.5% of our total holdings is cash. Now we’re paying every penny we get back from our multiple banks, which we’re currently paying 4.8%. That is an offset against charge, of very close to 31 basis point offset. Our average revenue per client is about 24. So our average client has a negative charge essentially or a net negative charge. So you can see quite how impactful this is. We’re not talking 2, 3, 4, 5 basis points, which is the difference between the headline rates of many, many providers. This is offsetting the entirety of the charge.

Bella Caridade-Ferreira:

Yeah, no, I got it, I completely get that. So I’ve got two questions. Firstly, what do you say to, some platforms will say, well, platforms aren’t designed to hold cash, so you know, therefore people should keep a minimum amount of cash on the platform and some might argue that 6.5% of your holdings in cash is too high. What do you say to that?

Glen Sweet:

We’re not making the decision on 6.5%, it’s the advisor that’s making, what’s appropriate and what is the most reasonable, suitable, appropriate position for this client in their circumstances, with what they’re trying to achieve. I don’t care whether the advisors recommend they hold us 1% cash or 15, it makes no difference to us. But it’s what’s suitable for that client at that time. To the point that platforms weren’t designed for cash, it’s one simple, it’s just a one word answer. Nonsense. Total nonsense. Platforms weren’t designed in the original days, they weren’t designed to deal with RDR, were they? They weren’t designed to deal with flexi access drawdown. They weren’t designed to deal with LISAs. They weren’t designed to deal with term deposits. They weren’t designed to deal with, you know, fractional trading on ETF’s. This stuff happens. Stuff changes, they weren’t designed to deal with consumer duty. Stuff changes. Change your platform, to be reasonable and appropriate.

Bella Caridade-Ferreira:

Absolutely. So look, I just wanted to talk to you through some analysis that we did. We went out and did some analysis on all the platforms to find out how many charge custody on cash and how many skim interest and also how many double dip. So you know I totally get your point that you know you’re one of a handful of platforms that charge custody for holding cash, but you don’t skim, so it balances out. So the client ends up in a neutral position. But would it surprise you if I told you that some platforms not only charge custody on cash, but then also skim the interest, so they’re essentially double dipping, and there are 4 platforms that do that.

Glen Sweet:

Sure. No, we’re aware and we track it every month actually, all of the providers, what they do, what their policy is, what their interest rates they’re paying. So it’s one of the best sources of inflows.

Bella Caridade-Ferreira:

So, that’s the point, isn’t it?

Glen Sweet:

Yeah, yeah.

Bella Caridade-Ferreira:

So, what they’re doing is essentially, underpinning their bottom line. Bringing in some well earned, not well earned, you could say some needed, well needed revenues at a time when perhaps they’re losing business elsewhere. That has implications, right?

Glen Sweet:

Yeah, it does. I mean, if you sort of massively overspend on a real platform and if you decided to get a new business or it hasn’t quite worked, you’ve had to backtrack, there’s clearly commercial pressures and what’s the easiest way to generate additional revenue that you hope will get the least headline? Skim excessively and or double dip, essentially so it’s it’s clearly, it’s a well thought through strategy and now there’s a, I mean there’s a fair degree of backtracking, also a justification as to why this might be in place; oh cash costs us a lot to run you know, yeah it is we’ve only cost us 8 and 9 basis points in addition to assets to run cash, so charge a touch more, that’s fine. But yeah, it’s disingenuous to suggest that it’s reasonable to take 50% or three quarters of the cash interest you generate to prop up your balance sheet to make yourself look sustainable and profitable on a long-term basis and how you can justify from a consumer duty perspective quite escapes me.

Bella Caridade-Ferreira:

Why do you think some adviser firms just aren’t recognising the importance of the issue?

Glen Sweet:

That’s an interesting point. I mean clearly it’s in our interest, and there’s a couple of other that providers do a good job on this as well, I mean, Aviva do a good job on this, in respect of paying back all interest. They’ll be banging the drum of course with their advice and say, “look, have you noticed that this is going on” and I’ll just relay one very quick anecdote. I mean, I was at PFS a few years ago, just before COVID, I think, and I highlighted this point with a particular advisor, he said “oh, God, I wish you hadn’t told me that. You’ve given me a problem now. I’ll have to rethink my internal processes now.” So yeah, it’s something that absolutely requires a bit more prominence. I think certainly, you know platform due diligence processes and consideration as to what the client is actually getting out of this. It’s quite important, well it’s crucial, for client outcomes.

Bella Caridade-Ferreira:

So what about the regulator, do you think the regulator is going to start analysing this in more detail, I mean they’ve already sort of raised their heads above the parapet and said what’s this?

Glen Sweet:

Yeah, they’ve asked, was it 7 questions, recently, just to say you know, paraphrasing very quickly, you know, what are you doing? What’s your policy? What have you changed? What do you intend to change? How do you think this is reasonable? Etcetera, etcetera. You know, you can imagine our answer was very short. I don’t think this applies to us guys, you know? But, yes, it’ll be interesting to see the outcome. Our view is that you need much tighter and proper disclosure on illustrations and fees, costs and charges reporting to make it more prominent to say, here’s the net outcome, here’s the actual. In the same way that you’ve got in respect of ex-ante and ex-post reporting. No, funds aren’t charging point 75 they’re charging point 75 plus their transactional cost. Let’s make this transparent and clear. No one charges 75 basis points and that’s now clear. So in this case, OK, there’s the headline rate. Here’s the current rate of interest payable and the net effect on you, Mrs Miggins. And here’s the situation. Whether the regulator is going to be that explicit or insist that the providers are going to need to be that explicit. We shall see on that point. But it definitely needs a higher degree of prominence and visibility, that’s for sure.

Bella Caridade-Ferreira:

I absolutely agree with you because, right now, when advisors do their, you know, “we’re going to be on this platform”, Transact, Aviva, etcetera, or Quilter, they’re only required, aren’t they, to say what the platform cost is and not what they, they don’t have to show the interest bit. So it’s half the picture. So we clearly do need to do some, something more about that.

Glen Sweet:

You know when it wipes off the entire, essentially the negative impacts or wiping off the entire you know, platform charge, then how is that not an impactful matter that needs to be disclosed to the client? I mean that’s just instant access cash. You’ve clearly got, not every platform, I mean some can, in fact only few can, do a term deposit so you know you aren’t stuck to 4.8%. If you want, I mean our current two best payers, you know, Aldermore and Investec; 5.65 and 5.7% respectively. If you want a bit longer term cash with a proportion of your cash in certain wrappers fine go and do that for a longer period then so you’re not limited to just holding instant access cash.

Bella Caridade-Ferreira:

So how complicated is that to do then, on the platform. You’ve got the treasury function, you’ve got to provide access to these banks and term deposits. Does everyone, can everyone, from your knowledge of the platforms, do they all offer this?

Glen Sweet:

No, only a very few can do that, because essentially you’ve got a situation whereby it’s troublesome to do it on a disaggregated basis. So if we get Mrs Miggins one with £10,000 with provider X and £12,000 for Mr Miggins. So you imagine doing all them separate deals and disaggregating it as a nightmare, you got to be able to aggregate them, so we’ve got to go, and we go to Investec, well, there you go, there’s, pick a number doesn’t matter, £8.58 million today on behalf of a number of clients on one bulk. Now they know if it’s a let’s say a 12 month term day 365, day 366, all that money’s going to come back to us, and there’s no built-in inertia rate if you like, as you get with the bank. If you go walk into them direct they pricing a degree of inertia, but that doesn’t, you know, that’s not the same on platforms, but you’ve got to have a bit on, the way we do it is essentially have a separate trust company to route these through, but it’s not that difficult, it’s just a bit of work. It wasn’t that difficult. It’s a bit of reconciliation, a bit of work and the troublesome bit is in the 1st place getting the term deposit providers to actually come on board. There’s always going to be a limitation, you know, holding, for example, building society terms is a bit of a problem. Because a platform would then become a member, so you get a custodian owner or legal ownership of the asset being a member of a building society. That’s problematic from a regulatory perspective. So you really needs to stick to banks per se. But certainly there’s, well we have multiple ones.

Bella Caridade-Ferreira:

Gosh, it is really complicated.

Glen Sweet:

It is really complicated stuff. Yeah, absolutely. So that’s why I say; it’s OK to charge a bit more than you might do for an asset, it’s complex, difficult, troublesome to deal with, but that’s all ok, that’s what we do. I mean, our business is dealing with complex, troublesome, difficult issues and making them as simple as we possibly can. That’s the raison d’etre of the business essentially. So yeah, it was ever thus with us.

Bella Caridade-Ferreira:

Yeah. So do you think, just from the fact that the regulator has started to look into this, have you had some conversations with the regulator or have you only just, you know, just answered the sort of initial survey?

Glen Sweet:

Yeah, you know, our Transact CEO, Johnathan Gumby has definitely had conversations with him about this matter and more than once. So we certainly made our feelings very, very clear on this particular point. So yeah, we shall await their review.

Bella Caridade-Ferreira:

Well, it’s certainly a clash with your consumer duty responsibilities, right, with everyone’s consumer duties responsibilities. Because if you are actually causing harm to the clients. If you are, you know, leaving them in a negative position, just because their cash is sitting on a platform, that’s demonstrable client harm. So I just really can’t see how the regulator will allow that to continue.

Glen Sweet:

There’s been some conversations, but I’m not at liberty to disclose those right now, but we’re certainly, we’ll come back to it at a later stage. I would add, to your word of demonstrable there Bella by adding foreseeable too. You can see it; it’s plain, it’s evident, it’s right on your nose. Go on then, justify, almost the unjustifiable in certain situations, you know, they’re taking 50 or 75% of the interest payable or in some, a couple of instances, all of it. I can’t see what wording you could use or phraseology you could come up with, that would sound ok to a client, an advisor, or a regulator. As to why this is ok, to do that to that degree, I’d find myself rather shocked by the wording. I suppose the other thing worth mentioning here is; it would be slightly more costly for smaller platforms to run cash as well, because they’ve got slightly smaller proportions typically. They haven’t built up the degree of cash that for example, we or AJ Bell or you know, other big platforms have done, and ours is just a shade over 3.3 billion. So if you think about it, what that gives you is not just the ability and the requirement to use multiple instant access accounts, we can also use, short term, term deposits within that to enhance the rate still further, which you couldn’t really get if you’re a small platform, if you’ve got you know if you’ve got a billion quid as an asset base and 50 million as cash, you haven’t really have that flexibility because we got 3.3 billion we can say ok, we can have some money on seven days, some on 14, some on 28 days some on, etcetera, and that enhances the rate further again and the third element enhances it.

Bella Caridade-Ferreira:

But that’s complicated as well.

Glen Sweet:

Yeah, it is. Yeah. Yeah. I mean that, that’s difficult. I mean, that’s again more troublesome and costly. But the net benefactor is the client. We should do it, it’s incumbent upon us to do it and we do and we will carry on doing it. The other thing is positive net flows If you’ve got positive net flows as a platform, that gives you the ability to go and say, “oh, we can deploy a little bit more with these term deposits”, whereas if you’ve got a net, you know basically a negative net flow as a platform, you think “oh my God, we’re going to have to stop doing quite as much as that, as we could have done”. So you have to put a higher proportion on instant access. Therefore, we’re going to get a lower rate for our clients. So again, it’s not just size and scale, but it’s the direction of travel too.

Bella Caridade-Ferreira:

Yeah. I mean, it’s an interesting point because, basically what you’re saying is this is about, you know, you’re managing your money to the best of your ability, so like, “we’ve got some spare cash here, let’s put a little bit more in.” You’re basically maximising, you’re investing, ok, I’m not going to say investing, it’s not the right word, but you are, allocating cash to achieve the best possible returns for your customers right by saying like, let’s put some in these term deposits, some here and some there.

Glen Sweet:

Yeah, exactly right. Exactly right. As markets change as conditions change, we keep a very, very close eye on this stuff. You know, to manage it as effectively as we can for the benefit of the client.

Bella Caridade-Ferreira:

So that takes a whole team of people really, to do that. I’m going to ask a really, really stupid question. What about playing money market funds? I mean BlackRock’s got some that sit on platforms. Can they play a role in that, you know, do you use money market funds as well?

Glen Sweet:

Well, we don’t need the same guys. I mean, advisors have got, yeah, there’s plenty of fixed interest and money market funds available. Last time I looked, scores of them. So yeah, they’re available too. Now on that point, they’ve got very strong liquidity, so if an advisor wants to go down that route, typically the rate, because of course then it has to be disclosed in illustrations, it’s a bit more work for the adviser to go down that road. Typically, the premium they could get on money market funds, it’s not much better than we’re getting anyway and by the time you’ve netted off the cost of doing that within the money market fund of fund Manager X is a very fine margin or marginal difference on net outcome to client, between those two things?

Bella Caridade-Ferreira:

And what about, you know, for smaller platforms? You know, obviously Transact’s much bigger, you’ve got a whole treasury function, you can do all sorts of stuff like that. But could a smaller platform just go, right, I’m going to put everything into a, for example, a BlackRock money market fund and that’s how I’m going to manage my treasury, until I’m bigger.

Glen Sweet:

No, there quite tight regulatory controls and it is about what proportion of monies — you could do that as a small platform, but it’s only ever going to be a very small part of that, whatever, number I just mentioned. You know, you got a billion quid and you got 50 million as cash. You know you’re only going to be able to use a very small portion because, you know the overall majority of our money, even at our size at 3.3 billion in cash is instant access, so there’s only proportion of the monies you put in the seven day and another little proportion on 14 day, for example. So yeah, so they can do it, but again, that’s only it would only get them a few enhanced, you know, a little enhanced rate you know and it might take the rate up 10, 20, 30 basis points, something like that. The much more impactful, net results to a client is how much you’re skimming in the first place.

Bella Caridade-Ferreira:

And that’s really important. You’ve already highlighted how you can actually save the client quite a substantial number of bps, so. So that’s a really really important thing to highlight. So as we come to the end of this sort of podcast, give me three things that you would like to see the regulator do on this, and how you would, you know, just summarise those 3 or 4 points that you think the regulator should take to protect client’s outcomes and make sure, you know that there isn’t any demonstrable harm.

Glen Sweet:

The three things that jumped to mind immediately. You spoke about two of them already, but the first one would be much more clarity in respect of disclosure. So in respect to illustrations and fees, costs and charges. Here’s the number, we’re going to make it more visible. So that’s definitely true. I certainly think from a second perspective is, you know, even some guidance from the regulator to say “look, this is an important issue, you do need to factor into your periodic reviews of platform usage around due diligence”. You know, that’s certainly true. It can’t just be overlooked or ignored.

Bella Caridade-Ferreira:

So that’s got to be factored in. That’s absolutely got to be factored in and it’s got to be that the client needs to be presented with both sides, right, the cost.

Glen Sweet:

Yeah, there’s gross costs and net costs, yeah. So let’s have a good clear understanding of what’s gone on. So one other point, that just jumped to mind is, I spoke about term deposits already, one other thing that’s massively impactful, massively impactful for certain platforms is the ability to take on corporate cash.

Bella Caridade-Ferreira:

Right.

Glen Sweet:

Most platforms can’t now. If you’re, I don’t know, you run Widgets & Co in Northamptonshire or something, and that’s the client of the advisor or certainly the directors are clients of the advisor. They got lazy money sat in a corporate account. The banks are going to give them next to nothing. I mean my bank, Santander, I walked past the other day. It was I think 0.00001% you get on corporate cash, Chuck it in, or you’ll just add it to your, let’s say they have 100 grand of cash, well, you need 50 grand for working capital. Put the other fifty in on instant access and get 4.8% and that will then end up, and we had one case, very well-known adviser up in the northwest tell me a case of a very similar situation. You know a little while ago where the cash from the corporate account paid for all of the charges on the grandparents account, the kids account, the grandchildren’s account of their LISAs and JISAs and junior pensions and all the accountancy fees.

Bella Caridade-Ferreira:

Wow

Glen Sweet:

For the extended family and a profit on top of that, which enabled the adviser to get into that corporate business, and now he’s got three or four other big corporate accounts. So I mean that got him, I think he’s told me that got him £3 million in inflows just being able to take corporate cash and it’s getting us huge inflows on bulk transfers you know from other market participants, yeah other platforms that aren’t being…

Bella Caridade-Ferreira:

They can’t do this corporate cash bit.

Glen Sweet:

Well, not just the corporate cash, but generally on cash. You know we’re hearing a lot of conversations. I mean there’s, the 300 million on the way to us right now in three different tranches for, from firms that say I’ve had enough and this was the final nail in the coffin, for the corporate cash, sorry not corporate cash, just cash in general and I’m just moving the lot to you now. So you know I’m not railing against the disparity, we love the disparity. We think it’s fantastic.

Bella Caridade-Ferreira:

Glen this podcast goes out to around 20,000 advisors, and they should be really listening to what you just said. So based on the fact that one advisor in the north focused on the corporate side of the, you know, the business it increases flow has brought him in three million worth of business, and, by doing, by moving everything to your platform, the profit on that cash has paid for all those expenses. Now that is a really, really good point to get across to everyone. So if you’re listening guys, you know what to do.

Glen Sweet:

Yeah, imagine how delighted those clients were, and the accountant was, oh, my God. You know, and off it went, and that’s a whole new business string for this particular firm, and they’re doing very well on it.

Bella Caridade-Ferreira:

Well, what I’m going to say again to all the advisers, listening is, if you want to know more about this then you know who to contact, that’s Glen Sweet at Transact and he can tell you exactly how to move your money and make your clients some additional profit on their savings.

Glen Sweet:

Well, Bella, thank you very much.

Bella Caridade-Ferreira:

No problem at all. It’s been great talking to you, it’s really interesting, this whole cash thing. I’ve been following it really, really closely for a while. As I said, we did some analysis on who’s skimming, who’s charging on costs, who’s charging on custody, etcetera, and it’s really quite, quite surprising and I do fully expect the FCA, you know, the regulator to come down and do more on this. They have to. Interest rates are going to stay high for a long time and this isn’t a problem that’s going to go away. So, Glen, look, thank you so much for taking the time to discuss it with me and I look forward to doing a catch up maybe, in a year or so’s time when the regulator has decided to do something about it and reviewing where we are with this.

Glen Sweet:

I’d be delighted to be able to shine an even brighter light on this one and we’ll carry on doing so. So thanks for the chat, it’s been very interesting and I hope it was of value to your listeners.

Bella Caridade-Ferreira:

I hope so too. Thank you very much, Glen and we’ll catch up over a glass of wine or maybe even on the golf course, if I’ve improved my skills.

Glen Sweet:

Oh yes, yeah, I’m sure we can, absolutely delighted to. Bella, Thank you very much.